Commercial Real Estate 2017: Changes in the Air

GEORGE RATIU | @GeorgeRatiu

Commercial Economic Issues & Trends Forum

REALTORS Legislative Meetings & Trade Expo | @NARLegislative
Washington, DC | May 18, 2017
What is a VCR?
What is a VCR?
Video Cassette Recorder

Developed in the 1960s; reached mass

market in the 1970s
VCR was the home TV recording tech of
1980s-90s
2016: VCR was officially out of
production
Do you remember RZRs & Curves? iPhones getting old

Motorola RZR marketed 2004-2007

Blackberry Curve introduced in 2007

2017: iPhone turns 10 years old

May we live in interesting times
TECHNOLOGY INFRASTRUCTURE POLITICS DEMOGRAPHICS
Artificial Public roads Presidential election Gen X / Gen Y / Gen Z
intelligence Transportation hubs Congress Urban / Rural
Autonomous States / Cities Wealth disparity
vehicles
Sharing services
3D Printing
Biotech

MONETARY/FISCAL FINANCE GLOBAL SOCIAL

Funds target rate Capital markets Economic weakness Wealth disparity
Federal budget Fintech Brexit/Nationalism Cannabis legalization
Crowdfunding Migration
Wars/military conflicts
as we swim in a sea of acronyms

NYSE SAAS P&L

GDP IRR ROI
WTO
LIBOR
B2B CDO GAAP
CAP ADS OECD
ISM
LTV
IR
EXP FX
CDS
ROE
BPS VAT NPV
P/E LOI FOMC
WTI CPI
NOI
EPS
DSCR
CMBS
EBITDA DCF $/SF DJIA
IMP
CAPEX
 NYSE SAAS P&L
GDP IRR ROI
WTO
LIBOR
B2B CDO GAAP

PEOPLE
CAP ADS OECD
ISM
LTV
IR
EXP FX
CDS
ROE
BPS VAT NPV
P/E LOI FOMC
WTI CPI
NOI
EPS
DSCR
CMBS
EBITDA DCF $/SF DJIA
IMP
CAPEX
Demographics accelerate change
2017 U.S. Population by Demographic Cohort

10.5%
Swing/Silent (69+)
25.9%

Baby Boomers (50-68)

23.6%
Gen X (38-49)

Gen Y (20-37)
24.5%
15.4% Gen Z (0-19)

Source: Sparks & Honey Source: Pew Research Center

 0.0000
1.0000
2.0000
3.0000
4.0000
5.0000
6.0000
7.0000
2000.Jan
2000.Jul
2001.Jan
2001.Jul
2002.Jan
2002.Jul
2003.Jan
2003.Jul
2004.Jan
2004.Jul
2005.Jan
2005.Jul
2006.Jan
2006.Jul
2007.Jan
2007.Jul
2008.Jan
2008.Jul
2009.Jan
2009.Jul
2010.Jan
2010.Jul
2011.Jan
2011.Jul
FOMC Fed Funds Target Rate (EOP, %)

2012.Jan
2012.Jul
2013.Jan
2013.Jul
2014.Jan
2014.Jul
2015.Jan
2015.Jul
2016.Jan
2016.Jul
Source: Federal Reserve Board
2017.Jan
0.000
5000.000
10000.000
15000.000
20000.000
25000.000

20001
20003
20011
20013
20021
20023
20031
20033
20041
20043
20051
20053
20061
20063
20071
20073
Bil.$)

20081
20083
Monetary policy helped housing, hurt savings

20091
20093
20101
20103
20111
20113
20121
20123
20131
20133
20141
Households: Nonfinancial/Tangible Assets: Real Estate (NSA,

20143
20151
20153
20161
2006.Q2: $22.7T > 2016.Q4: $23.1T

20163
Source: Federal Reserve Board
Multifamily demand follows population growth

Mixed-use urban development;

live/work/play
Class A supply; small floorplans;
amenities
Demand remains robust; 2016
net absorption 201,300 units
2016 Completions: 242,800 units
Vacancy moves up (4.9%),
moderates rent growth
Affordability declines
 0.00
500.00
1000.00
1500.00
2000.00
2500.00
2000.Jan
2000.Jul
2001.Jan
2001.Jul
2002.Jan
2002.Jul
2003.Jan
2003.Jul
2004.Jan
2004.Jul
2005.Jan
2005.Jul
2006.Jan
2006.Jul
2007.Jan
2007.Jul
S&P 500 (EOP, 1941-43=10)

2008.Jan
2008.Jul
2009.Jan
2009.Jul
2010.Jan
2010.Jul
2011.Jan
2011.Jul
2012.Jan
2012.Jul
2013.Jan
2013.Jul
2014.Jan
2014.Jul
2015.Jan
2015.Jul
2016.Jan
2016.Jul
DJIA (EOP, May 26, 1896=40.94)

2017.Jan
0.00

Source: Wall Street Journal

5000.00
10000.00
15000.00
20000.00

10000.000
20000.000
30000.000
40000.000
50000.000
60000.000
70000.000
25000.00 80000.000

0.000

2000.Q1
2000.Q3
2001.Q1
2001.Q3
2002.Q1
2002.Q3
Bull market boosts household wealth

2003.Q1
2003.Q3
2004.Q1
2004.Q3
2005.Q1
2005.Q3
2006.Q1
2006.Q3
2007.Q1
2007.Q3
2008.Q1
2008.Q3
2009.Q1
2009.Q3
2010.Q1
2010.Q3
2011.Q1
2011.Q3
2012.Q1
2012.Q3
2013.Q1
2013.Q3
2014.Q1
2007.Q3: $52.6T > 2016.Q4: $75.5T

2014.Q3
Households & Nonprofit Org: Total Financial Assets (NSA, Bil.$)

2015.Q1
2015.Q3
2016.Q1
2016.Q3
Source: Federal Reserve Board
Office demand drives vacancy under 13%

Payroll employment advances;

professional & business svcs.
Mobile workforce; increased
telecommuting
Space efficiency, flexible designs
Sustainability tied to workforce
retention & financial impact
Positive net absorption + moderate
completions = Vacancy @ 12.9%
Industrial absorption boosts rents

Increased trade
Rising e-commerce
Last mile distribution
Intermodal logistics
Panama Canal; East coast ports
Net absorption: 256.7M SF
Net rent growth accelerates,
$6.6 PSF
 200.0
400.0
600.0
800.0
1000.0
1200.0
1400.0
1600.0
1800.0

0.0
2000.Q1
2000.Q3
2001.Q1
2001.Q3
2002.Q1
2002.Q3
2003.Q1
2003.Q3
2004.Q1
2004.Q3
2005.Q1
2005.Q3
2006.Q1
2006.Q3
2007.Q1
2007.Q3
2008.Q1
2008.Q3
2009.Q1
2009.Q3
2010.Q1
2010.Q3
2011.Q1
2011.Q3
2012.Q1
2012.Q3
2013.Q1
Real Corporate Profits After Tax (SAAR, Bil.Chn.2009$)

2013.Q3

2016.Q3: $1.5 Trillion

2014.Q1
2014.Q3
2015.Q1
2015.Q3
2016.Q1

Source: BEA
2016.Q3
Corporations remain cautious

1000
1500
2000
2500

0
500

2000.Q1
2000.Q3
2001.Q1
2001.Q3
2002.Q1
2002.Q3
2003.Q1
2003.Q3
2004.Q1
2004.Q3
2005.Q1
2005.Q3
2006.Q1
2006.Q3
2007.Q1
2007.Q3
2008.Q1
2008.Q3
2009.Q1
2009.Q3
2010.Q1
2010.Q3
2011.Q1
2011.Q3
2012.Q1
2012.Q3
2013.Q1
2013.Q3
Corporate Cash/Cash Equivalent Holdings (NSA, Bil.$)

2014.Q1
2014.Q3
2015.Q1
2016.Q4: $2.1 Trillion

2015.Q3
2016.Q1
2016.Q3
Source: Federal Reserve
Retail transformation

Department stores lose ground

Food/drinking services: NYs Eataly
Small/discount grocery stores heat up; Aldi,
Lidl
Completions remain low, availability at 7.1%
Rents experience solid growth, $16.6 PSF
Speaking of investors

Interest Rates % (10-yr Gov bonds)

9.6 10

8.1
6.9

3.7
2.3
1.6 1.2
0.39 0.690.470.840.390.57
0.04 0

Turkey
Euro area
U.S.

Britain

Denmark

Brazil
Canada

France
Germany
Sweden

Russia
Finland

China*
Switzerland

India
Japan

Source: Economist Intelligence Unit; *5-year yield

Global CRE investors hit Pause button, search for yield
16 U.S. Markets in Global Top 30
billions
Americas Asia Pac EMEA Market Sales Vol. ($B) YoY % Chg.

NYC Metro $60.0

2016: $860B; -11% YoY LA Metro $34.9
SF Metro $30.0
2017.Q1: $157B; -19% YoY London Metro $27.7
$250 Paris $23.1
DC Metro $18.5
Dallas $18.0
Chicago $17.5
Tokyo $16.4
Atlanta $15.6
Miami/So Fla $15.1
Shanghai $14.8
Boston Metro $13.9
Seattle $13.7
Hong Kong $13.5
Amsterdam/Randstad $10.7
Denver $10.5
Seoul $9.9
Phoenix $9.6
Berlin-Brandenburg $9.6
Sydney $9.3
Austin $8.3
Singapore $8.1
Houston $8.0
$0
Rhine-Ruhr $7.9
13Q4

16Q1
12Q1
12Q2
12Q3
12Q4
13Q1
13Q2
13Q3

14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4

16Q2
16Q3
16Q4
17Q1
Madrid $7.5
San Diego $7.2
Las Vegas $7.2
Munich $6.7
Source: Real Capital Analytics
Frankfurt/Rhine-Main $6.7
Where is global CRE money flowing (large cap)?
Q1'17 Last 12 Months
$b YOY Chg $b YOY Chg
United States 76.1 -19% 387.8 -8%
Germany 17.1 40% 68.5 -4%
United Kingdom 10.4 -47% 53.1 -45% YoY Sales Volume Gains - Q1.2017
China 4.2 -40% 35.0 -2%
Japan 7.2 -13% 31.3 -19% - San Francisco: 15%
France 3.9 -37% 30.5 -12% - Dallas: 11%
Australia 1.8 -59% 23.8 -26%
Canada 3.2 -19% 18.5 1%
- Charlotte: 45%
Spain 3.5 63% 17.9 76% - Houston: 10%
Sweden 2.9 -24% 17.3 12% - Baltimore: 97%
Netherlands 2.1 -29% 14.7 7%
South Korea 2.0 242% 14.0 30%
Hong Kong 2.9 -41% 13.2 -10%
Italy 1.7 -40% 10.1 -4%
Singapore 2.3 170% 10.0 107%
All Others 15.1 -23% 78.1 -13%
Grand Total 156.8 -19% 823.9 -10%
 -50%
50%
150%
200%

100%

-100%
0%
2008.Q4
2009.Q1
2009.Q2
2009.Q3
2009.Q4
2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
2012.Q3
2012.Q4
2013.Q1
2013.Q2
REALTOR CRE Markets

2013.Q3
Sales Volume (YoY % Chg)

2013.Q4
2014.Q1
2014.Q2
2014.Q3
2014.Q4
Real Capital Analytics CRE Markets

2015.Q1
2015.Q2
2015.Q3
2015.Q4
2016.Q1
2016.Q2
2016.Q3
2016.Q4
10.0%
20.0%

-40.0%
-30.0%
-20.0%
-10.0%
0.0%

2008.Q4
2009.Q1
2009.Q2
2009.Q3
2009.Q4
U.S. CRE is a tale of two markets

2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
2012.Q3
2012.Q4
2013.Q1
2013.Q2
REALTOR CRE Markets

2013.Q3
Sale Prices (YoY % Chg)

2013.Q4
2014.Q1
2014.Q2
2014.Q3
2014.Q4
Real Capital Analytics CRE Markets

2015.Q1
2015.Q2
2015.Q3
2015.Q4
2016.Q1
2016.Q2
2016.Q3
2016.Q4
Sources: NAR, Real Capital Analytics
Large cap U.S. markets follow global trends
$b Transaction Volume Cap Rates
180 Off Ret Ind Apt Htl
9.0%
160
140
8.0%
120
100 7.0%
80
6.0%
60
40
5.0%
20 Moodys/RCA CPPI
25% Year-Over-Year Change
0
20%

15%
Year-Over-Year Change
100%
10%
50% 5%

0% 0%

-50% -5%
'11 '12 '13 '14 '15 '16 '17 '11 '12 '13 '14 '15 '16 '17
Source: Real Capital Analytics
as yield drives gains in secondary CRE markets
20%

2016
NMM CBD Vol ($b) YOY
15%
6MM Industrial
Office Office 141.7 -6%
Retail 75.7 -16%
NMM Industrial NMM
6MM CBD Office
Industrial 59.2 -24%
Apartment
6MM Apartment Hotel 35.8 -29%
10% NMM Suburban
Office Apartment 158.4 3%
CPPI Change '16 vs '15

Dev Site 17.8 -26%

Total 488.6 -11%
5% Major Metros 206.1 -16%
Hotel
6MM Suburban Secondary Markets 215.5 -3%
6MM Retail
NMM Retail Office Tertiary Markets 64.5 -12%
Source: Real Capital Analytics
0%

-5%
-40% -30% -20% -10% 0% 10% 20%

Volume Change '16 vs '15

REALTORS sales drop 4.4% in Q1.2017. Blip or trend?
Sales Volume Sales Prices REALTORS Most Pressing Challenges
30%

Inventory Shortage
20%
37% 37%
Pricing Gap: Buyers
10% vs Sellers
Local Economy
Percent Change, year-over-year

0%
2008.Q4
2009.Q1
2009.Q2
2009.Q3
2009.Q4
2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
2012.Q3
2012.Q4
2013.Q1
2013.Q2
2013.Q3
2013.Q4
2014.Q1
2014.Q2
2014.Q3
2014.Q4
2015.Q1
2015.Q2
2015.Q3
2015.Q4
2016.Q1
2016.Q2
2016.Q3
2016.Q4
2017.Q1
21% 19%
Financing
-10%

13% 16% Other

-20%

14% 12% National Economy

-30%

8% 10% Distressed Properties

-40%
4%
5%

-50% Source: National Association of Realtors 2017.Q1 2016.Q4

Capital markets retain liquidity at high end
CRE Debt Universe - $3.76T CRE Equity Investments - $2.85T

U.S. Chartered
Depository Private Equity
Institutions
CMBS, CDO, other REITs
ABS
Pension Funds
GSEs (Freddie,
Fannie) Life Insurance Cos.
Life Insurance Commercial Banks
Companies
Corporations
Foreign Banking
Offices in U.S. Foreign Investors
Other
Gov't, GSEs & Others
Source: Federal Reserve Board
Sources: Situs RERC, NAREIT, PREA, AFIRE, Prequin, Real Capital Analytics, NCREIF
as financing in small cap markets diverges
REALTOR Commercial Real Estate Lending Sources Real Capital Analytics Lending Sources ($2.5M+)
100%
100% Small Business Administration

REITs 90%
90%

Regional Banks 80%

80%
Public Cos. Pvt/Other
70% 70%
Private Investors Reg'l/Local Bank
60% 60%
Other Nat'l Bank
50%
National Banks 50% Int'l Bank
40% Local/Comm. Banks 40%
Insurance
30% Life Insurance Cos.
Gov't Agency
30%
Financial
20% International banks
20% CMBS
GSEs
10%
10%
Credit Unions
0%
2010

2011

2012

2013

2014

2015

2016

CMBS 0%

2015
2011

2012

2013

2014

2016
Source: Real Capital Analytics
Source: National Association of REALTORS
and lending conditions tighten, despite rising NOI
Change in Lending Conditions over Past Year 12-Month Change in NOI ($/SF) of properties sold/leased
100%
100%
Decreased 50% - 75%
90%
90% Decreased 40% - 49%
80%
Eased Significantly 80%
Decreased 35% - 39%

70%
Decreased 30% - 34%
70%
Eased Somewhat Decreased 25% - 29%
60%
60% Decreased 20% - 24%
50% Not Changed 50%
Decreased 10% - 19%

40%
Decreased 5% - 9%
40%
Tightened No Change
30%
Somewhat 30% Increased 20% - 25%
20% Tightened 20%
Increased 15% - 19%
Significantly Increased 10% - 14%
10%
10%
Increased 5% - 9%
0%
0% Increased 1% - 4%
2010 2011 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2017
Source: National Association of REALTORS Source: National Association of REALTORS
Legislative & regulatory uncertainties remain
Causes of Insufficient Bank Capital for CRE Lending:
100%
Other, please specify
90%
Global economic uncertainty
80%

70% U.S. Economic uncertainty

60%
Inability of banks to dispose of
50% distressed assets
New/proposed US legislative and
40%
regulatory initiatives
30% Regulatory uncertainty for financial
institutions
20%
Slow-down in pooling/packaging of
10% CMBS
Reduced NOI, property values, and
0%
equity
2011 2012 2013 2014 2015 2016
Source: National Association of REALTORS
 CRE Outlook positive fundamentals for 2017

Commercial Real Estate Vacancy Forecast (%)

2016.Q4 2017.Q1 2017.Q2 2017.Q3 2017.Q4 2018.Q1 2018.Q2 2018.Q3 2016 2017 2018
Office 13.6 13.5 13.3 13.0 12.7 12.5 12.4 12.4 13.0 13.3 12.5
Industrial 9.4 9.2 9.0 8.7 8.4 8.1 7.9 7.9 9.4 9.1 8.1
Retail 13.2 12.5 12.5 12.5 12.6 12.7 12.8 13.1 12.0 12.6 12.8
Multifamily 5.9 6.5 6.3 6.1 6.5 6.2 6.1 6.2 6.3 6.2 6.2
Source: National Association of REALTORS
CRE Outlook investment risks

Risks Spread Between CRE Yields or Going-in Cap Rates and 10-Year Treasury

Economic growth > CRE

Fundamentals
Cost of funds vs. yield

Legislative:
Tax reform
IRC Sec. 1031
Regulatory:
Dodd-Frank (?)
Basel III - HVCRE
www.NAR.REALTOR/research-and-statistics

Economy

Capital markets

Property markets
Office
Industrial
Retail
Apartment
www.NAR.REALTOR/research-and-statistics

Economic Overview

Commercial Real Estate

Survey Results
Market Environment
Lending Environment
Appraisals
Commercial Real Estate 2017: Changes in the Air

GEORGE RATIU | @GeorgeRatiu

Commercial Economic Issues & Trends Forum

REALTORS Legislative Meetings & Trade Expo | @NARLegislative
Washington, DC | May 18, 2017